Investment Decision-Making: Understanding the Metrics that Matter (2024)

When considering an equity investment in a company, investors typically evaluate the potential return on their investment based on several key metrics — the stage of the business, investor priorities and risk tolerances, and the size of the company. A few takeaways -

Investors generally seek companies that have a history of revenue growth and a promising future growth trajectory. They evaluate revenue trends, customer acquisition rates, and market opportunities to gauge the company's potential for growth.

Investors look for companies with high gross margins, which indicates a profitable business model.

Investors evaluate the cost of acquiring new customers with a general rule of thumb that companies with low Customer Acquisition Costs (CAC) can scale more efficiently and are more attractive to investors.

Investors look at the ratio of Life Time Value (LTV) to CAC to evaluate how profitable a customer is over their lifetime compared to the cost of acquiring them; favouring businesses with higher ratios.

Investors look out for the burn rate (how quickly the business is spending) to determine how long it can sustain its operations.

The most significant (arguably) is the Management Team. Investors evaluate the management team's experience, expertise, and track record. They assess the team's ability to execute the company's strategy and adapt to changing market conditions.

By analyzing these metrics, investors can make informed decisions about which companies to invest in and help them achieve their financial goals. Investors have a keen eye for metrics when evaluating a company's equity investments. However, the metrics that they prioritize may differ based on the stage of the business, industry, and market conditions. Early-stage investors may be more interested in a company's potential for growth and customer acquisition, while later-stage investors may focus more on the company's financial performance and ability to generate profits.

Companies seeking investment should be well-prepared to present data and metrics that demonstrate their potential for growth and profitability. By doing so, they can increase their chances of securing the investment they need to take their business to the next level.